Saving for Short- and Long-Term Goals
With your spending in check, you’re ready to save. For virtually everyone, this starts with an emergency fund that can protect you when times are tough. (We’ll discuss emergency funds in more detail a bit later.) Once that’s settled, you’ll have your personal financial goals to save for. Everybody has goals they can only reach by saving enough money, ranging from necessities like retirement to fun diversions like vacations. You could try to save for all these with one large savings account, but you may have an easier time reaching your goals by tackling each with a different approach.
Consider your savings approach for short- and long-term goals:
Short-term goals. These are any goals less than 3 years away. When your deadline is this close, you probably don’t want to take any risks with your money. Consider accounts that offer guaranteed interest, such as savings accounts, money market accounts and certificates.
Long-term goals. These are any goals 3 to 10+ years away. When you save in the long term, you can still take advantage of the same low-risk savings vehicles used with short-term goals. You may add in other investments, such as lower-risk bonds and index funds, when your goal is further away. This increases your risk but also opens the possibility to earn more for your goal, and faster. For goals that are more than 10 years away, you can afford to put money into higher-risk investments since your money can ride out downturns in the market. You’ll probably consider investment vehicles designed for specific goals, such as a 529 plan for college or a 401(k) for retirement savings, which may offer additional tax savings.
Identifying and Prioritizing Your Needs and Wants
If you’re able to set aside money for all your goals right now, that’s great! But chances are you’ll need to make some tough decisions about how you prioritize your goals. Ask yourself, “What do I really need? And what do I just want?” Needs should be saved for as soon as you can. The wants can always wait until you have more discretionary income (which you found when you were creating a budget). If you’re having trouble telling what should be funded first, here are some steps to help you prioritize financial goals:
- List out your goals. Having all your goals put in one list, with amounts and general deadlines, can provide perspective on how much you’d like to get done and by when. Divide the amounts by the number of months until your deadline and don’t forget to factor in interest.
- Recognize which deadlines can’t budge. In the previous step, you might have found that you need to save more each month than you can afford. You may need to set aside a few of your goals that don’t need to be met soon, like purchasing a new car when your current car still runs. Make room for goals like saving for retirement and paying off high-interest debts.
- Factor in tax incentives. When you save in accounts designed for qualified K-12 and college expenses and retirement savings, such as a 529 or IRA plan, you’re also taking advantage of tax benefits. For example, saving in a traditional IRA means you won’t pay taxes on that money until withdrawing for retirement, provided you meet certain restrictions. Taking advantage of these tax breaks can mean lowering your income taxes, effectively enabling you to save more than you could have otherwise.
- Grab opportunities for free money. If your employer offers a matching program for your employer-sponsored retirement plan, take advantage of it. If you aren’t contributing enough to get the full match, you’re missing out on free cash with every paycheck.
- Funnel money appropriately. If you’re saving for multiple goals using a savings account, consider splitting up your money into different accounts for different goals. This can make it easier to track progress for each goal. And, if you automate deposits into your savings, you can be sure your highest-priority goals are making steady progress.
How to Get Into the Savings Habit
“I’d like to start saving money, but I’m not sure if I can afford it right now.” If you’ve said these words yourself, don’t worry. Even if you’re in an entry-level position, you can start saving. It just takes a bit of discipline to curb spending habits and start proper saving techniques. Try these techniques:
Pay yourself first—automatically.
Make saving easy by setting up a portion of your Direct Deposit to be automatically deposited into a savings account when you’re paid. Whether it’s 5 or 10 percent, $10 or $100, every bit counts.
Know that every dollar adds up.
That goes for saving and spending. Little purchases here and there can slowly eat away at your paycheck. If you put away $2 in your savings instead of buying a cup of coffee every day, you’d have around $60 saved each month. (You can always get your caffeine fix from the home-brewed stuff.)
Adopt "monkey see, monkey don’t" habits.
It may seem like your friends can freely spend their money without a care in the world, so why can’t you? They might earn or work more than you think, or they could be overspending with credit cards. Live within your means.
Separate your accounts.
If you haven’t opened a savings account yet, get on it! Keeping your checking and savings in one account can make it easy to accidentally spend away what you’ve saved.
Direct new money to your goals.
Redirect to savings any pay raises, tax refunds or other money you didn’t count on in your budget. You won't miss the money because you haven't been seeing it anyway.
Automating Your Savings: Tools
Life is busy. We hear you. It’s easy to push saving aside when you have so much else to do, but you can save time and work toward your goals by automating more of your banking.
Here are just a few of the ways you can make saving a snap:
Mobile deposit. Keep forgetting to take that check to the credit union or ATM? Not a problem. Most financial institutions offer apps you can use to deposit checks into your account anytime. Just snap photos of the front and back of your check, and you’re good to go!
Automatic transfers. Want to set aside money every time you get paid, but keep forgetting or don’t have the time? Automatically save money every payday by using automatic transfers! Have the reassurance of knowing you’re tucking a little away for the future.
Direct Deposit. Have your paycheck deposited directly into your account, without the need for checks or cash. You can even receive your money when you’re away from home on deployment or vacation. As an alternative to automatic transfers, Direct Deposit also allows you to automatically send a portion of your income straight into your savings account.
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